Energy & Capital

South Korea LNG Investing

Demanding Cheaper Energy

South Korea has plans to reduce its expansion of atomic energy, making a final decision by year end and pending public feedback and government approval.

The world’s second-largest buyer of liquefied natural gas will be looking to add new LNG deals to its mix and most likely will seek supplies outside of Asia, where there are recurring supply shortages.

Atomic energy accounted for roughly 26 percent of South Korea's power generation capacity in 2012, according to Bloomberg. The nation had planned to grow this to 41 percent by 2035, but it will not scale the target back to 22 and 29 percent.

This announcement comes from lingering safety concerns brought on by Japan’s Fukushima nuclear disaster. Less than a week ago, the government also said it would indict 100 officials on charges of corruption and bribery in South Korea’s nuclear industry.

South Korea imports nearly all of its energy today and faced threats of power shortages earlier this year. It will be looking to increase its use of other fuels to fill the future gap in nuclear power, and most notably, it will turn to natural gas, especially as consumption continues to surge on.

This shift away from nuclear will give buyers the added confidence to make a full on commitment to gas.

If this past summer is any indication, things are already swinging into action. Although summer temperatures were higher than usual and there were nuclear outages, South Korea’s LNG demand shot up 40.2 percent in August from the same time period in 2012, according to Platts. The nation imported 3.27 million metric tons of LNG in August, a figure that was up 35.3 percent from July.

Qatar is currently the top LNG supplier for South Korea, but with high gas prices in Asia and a growing market from the West, the landscape is changing.

The U.S. Effect

North America sits at the top of the list with a chance to make a great impact on South Korean LNG. Other countries have shale gas reserves but lack the technology and finances for development. And now that the U.S. has decided to allow gas exports, it can keep pace with ramped up production and start to make considerable deals..

Asian countries know that the U.S. sits on enormous gas reserves and has the ability to ship it out at a much cheaper price than what the Asian market is currently offering.

South Korea buys gas at roughly $15 or more per million British thermal unit. That is nearly double the rate paid in Europe and four times that in the U.S.

If the U.S. can begin to successfully ship its gas to Asia, it would significantly drive down prices in a region that consumes two-thirds of the world’s LNG, and it would lead to the first significant West-to-East gas trade.

And this is why gas deals from U.S. terminals have been popping up in recent months.

South Korea’s state-owned Korea Gas Corp (KSE: 036460), which has a monopoly on wholesale distribution, is preparing for the increase in gas demand and is looking to the West to satisfy that need. Its LNG sales have gone up nearly 20 percent in 2013.

That means Korea Electric Power Corp (NYSE: KEP), the country’s monopoly on electricity supply, will see similar increases to its power.

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Taiwan and Japan

If we leave South Korea for a moment, we’ll see that the trend has reached other Asian countries like Japan and Taiwan. Japan imports even more LNG than South Korea.

Plans in these countries show a similarly slowed pace of nuclear expansion, and as this happens, LNG is becoming the benefactor.

When deciding on a long-term energy policy, LNG is the logical choice right now. It doesn’t have many restrictions, and unlike coal, it doesn’t create as many environmental problems.

Taiwan is in the process of building its fourth nuclear plant, but the project is already hitting snags. And leaks have been found in one of its other plants.

President Ma Ying-jeou has already said that atomic energy will be abandoned as soon as an economically and environmentally friendly alternative can be found.

In Japan, finding a good LNG source is paramount, while all of the nation's nuclear plants sit idle and it pours out tons of money to import fossil fuels. Japan hit a record trade deficit this year because of the rising price of fuel, and that even includes the LNG it has been receiving from Australia and Malaysia.

Asia as a whole will definitely be the driving force for LNG demand in the future. Nations will sign contracts that will account for 70 million tons per year by 2020, according to Bloomberg, and 180 million tons by 2025.

Moving Forward

Woodside Petroleum Limited (ASX: WPL) will be looking to sell LNG from its new Browse project to South Korea. It has partnered up with PetroChina (NYSE: PTR), Mitsubishi Corp (TYO: 8058), and Mitsui & Co (OTC: MITSY).

The Australian project will cost considerably less than an onshore plant because of its giant fleet of vessels offshore, which could offer a better price tag than deals in the past coming out of Australia.

Woodside claims it is now able to develop LNG in a number of ways, not just the traditional way via onshore plant. The Browse project will prove to be a competitive factor for suppliers from the likes of the U.S.

Still, as South Korea and other Asian countries move away from nuclear, the gap left open will be filled with gas – at least in the short-term – and they will need a lot of it. Looking further down the road, it will probably be a combination of gas and renewables.

If all the proposed U.S. LNG export projects were approved and were online today, the U.S. would have the world’s largest export capacity. And the U.S. is headed in that direction – but government approval still lags behind, even as the pace has quickened.

South Korea is the only major importer that presently has a free-trade agreement with the U.S.

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Editor Keith Kohl breaks down three U.S. LNG investments and shows readers how to find the safe plays in LNG.

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